The Hain Celestial Group, Inc. (HAIN) Earnings Call Transcript & Summary

Okay, then. Good afternoon, everybody. I'm Alexia Howard, the U.S. food analyst for Bernstein, and I'm absolutely delighted to have Mark Schiller, the CEO; and Javier Idrovo, the CFO of Hain Celestial with me here this afternoon. I am hoping -- looking forward to a very productive discussion. As you probably all know, if you've been following the story, Hain embarked on a pretty ambitious turnaround program that was announced at the Investor Day in early 2019, which was a few months after Mark took over as CEO. And thus far, the company has really been hitting it out of the ballpark in terms of the margin progress that they've made over the last 18 months or so. And the top line over the last couple of quarters has really started to come around also. So it's been a great performing stock over the last year and a bit. And here we are trying to figure out where things go from here.

So Mark, I guess, with that as an introduction, maybe I can just ask you. I mean, now that you're 2 years into the role, what have been the biggest surprises so far for you?

I think when I first came in, the biggest surprise was that we were much more of a holding company than an operating company. And I had expected we would have basic processes that we just needed to refine. But a lot of it was -- turned out we needed to put those in place. So that was a little bit of a surprise and heavier lift than I thought. But on the flip side, the organization was incredibly resilient and receptive to change. A lot of times when you come into a turnaround, getting people on to the bus and getting them excited about the journey takes a long time to get done. But I think people were craving change, and they knew that we were off track, and they were very excited to participate. And I think that's part of why we've made such good progress in a short period of time.

Great. That's great to hear that the employees have really rallied around. Certainly, that seems to be absolutely key, particularly during a situation like the one that we've got with the pandemic right now. So back in early 2019, as I mentioned, you laid out a pretty comprehensive 3-year strategic plan and then a year later, the pandemic hit us. So can you talk about how the pandemic specifically has affected your operations and what adjustments you've had to make to adapt to this new environment?

Sure. So obviously, the first thing was, how do I keep people safe. When this first started and the death rate was high and there was panic buying, we needed to first make sure that we had an environment where people could come to work and stay safe. We had to figure out how to work remotely, obviously, which if you had told me a year ago that we would all be working from home and we would be thriving, I would have told you it would be -- we don't even know if we have the technology to do it, let alone the culture and the processes. So a lot of it was adapting to the immediate environment in front of us, first and foremost. And then secondarily, it immediately pivoted to supply and how do you secure supply, how do you make sure that you've got backups for your backups. Because whether you're using a third-party manufacturer or sourcing of ingredients and packaging, how do you make sure you have enough of what you need to understand the length of your supply chain, that you understand where the demand spikes are going to happen. So a lot of it was, I'll call it a little bit of scrambling at the beginning, but with very clear intent and very clear objective in terms of what we all needed to do. It didn't take a lot to rally everybody around what had to be done, but there was a lot to figure out. And I think one of the things that distinguished us throughout the pandemic is that our service levels have stayed pretty high since the beginning surge. And I think we've been the beneficiary of space gains and won favor with a lot of our customers because we were able to continue to supply consistently throughout and continue to do so today. I would tell you, as we go into the surge that's potentially coming in front of us, we are far better prepared. We have about $50 million more of inventory on hand. It's all the things that have the longest supply chain and the least amount of backups so that we are sure that we'll be able to supply everything. But we feel very well prepared right now to face whatever may come our way.

Great. So yes, and it's going to be an interesting next few months. It feels as though it's a challenge right now given the spike in cases, and I imagine that your sanitizer business will probably have a bit of a resurgence there. But then hopefully, with the vaccine coming next year, things will start to normalize. So I've got a question that's come in. And I would say for anybody that's on the line listening or watching us, there is a pigeon hole link. I think it's on the left-hand side of your screen. If you want to write in a question, please feel free to click on that link and then write your question in, and we'll try and incorporate it into the discussion today. So the question is compared to the pre-pandemic period, are there certain opportunities that Hain is more focused on now than it would have been otherwise?

Well, certainly, things like sanitizer is a good example of us being very opportunistic and seeing a need in the marketplace and customers reaching out to us and saying, do you have any idea how to get this? And basically, out of nowhere, we created a business in 4 weeks and have sold a good $10 million worth of sanitizer since the pandemic began. But I would say that the biggest opportunities for us are twofold. One, continue to supply very predictably so that retailers can count on us. And counting on us means when they have a merchandising opportunity, we're going to get the call. When they have a void on their shelf and a hole, they'll call us to fill it. And so I think that steadiness of our supply chain is -- continues to be a big opportunity, but one where we've done very well. And then I think secondarily, we've used this pandemic as an opportunity to play offense where many are having to play defense. So we are launching innovation. We're spending money on trade. We're using shopper card data to bring new people into our franchise. We've increased our marketing spending pretty significantly. And we think there's a big window here for people that can take advantage of it to get new customers on board because people are trying different things, they're making lifestyle changes, their favorite brand may not be available at shelf. And so us kind of being on the balls of our feet presents a lot of opportunity for us.

So I guess linked to that, what have been the biggest benefits and challenges presented by the pandemic and maybe focusing on the U.S. versus Europe?

Yes. So the challenges have been, again, the consistent supply. And whether that's capital that we had intended to put in place that got slowed down or whether it's ingredients that we need to get, we've spent a lot of time and energy finding alternate sources of things to make sure that the machine keeps turning. And that has been distracting certainly versus what our intentions were before the pandemic. But we've been, as I said, doing a good job of keeping up with it. I think on the positive side, I think this has actually been a rallying cry for the organization. A lot of people talk about how difficult it is to work from home and how hard it is to build culture. But we've dramatically increased the communication. We've got great clarity of purpose. We've introduced things like a fund called Hain Helping Hain, where we've given away hundreds of thousands of dollars to employees in need. So whether that's people that were affected by the fires on the West Coast or a spouse that lost a job or whatever, it's been very galvanizing and uniting. And again, I think that just makes us a stronger company going forward.

Makes sense. And are there any big differences between the U.S. and Europe in terms of the challenges or the opportunities that you've been presented with?

Yes. So when I got here initially, international was kind of the annuity that allowed us to make the changes that we need to make in the U.S. where we were a little bit in free fall. And now that the U.S. is growing so rapidly, internationally has been somewhat of a laggard in terms of performance in our algorithm. We're now looking to them for growth. The challenge has been making the changes that we need to make in the middle of the pandemic. So we are taking the North American playbook that has worked so well here and bringing it over to Europe, and it's just hard to do remotely, right? I have a whole team of people that I could bring in as a SWAT team to get them jump-started on the productivity things that we need and the processes that we need. It's a little bit harder to do it remotely, but we are making really good progress. We have the right leader in place. We've generated a robust list of productivity. And we're starting the path. It's just a little bit more challenging when you can't be face to face, and you can't help people to the extent that you might otherwise.

Sure. No, no, I totally understand that. So the strategic plan that you laid out early in 2019 called for minus 4% to minus 6% top line growth in fiscal '19 and with EBITDA margin of just 7% to 9%. But over time, you expected the company to move more towards 3% to 6% top line growth and an EBITDA margin of 13% to 16%. Now this past quarter, your EBITDA margin was 11%. Does that mean that the pace of margin expansion might start to slow down from here? Or are you still confident that you've got multiple years of outsized margin improvement?

Yes. We have plenty of room still on margin. I remind the internal organization all the time that we are still well below the industry average in terms of gross margin and EBITDA margin. And we have more than 100 productivity projects identified in North America, and we have about 50 identified in Europe. Obviously, we put them on a 2-by-2 matrix in terms of complexity and size of the price. So if it's worth a lot and it's easy to execute, we do those first. If it's not worth very much and it's very complex, those go to the bottom of the list. But we're not hurting for ideas to continue to drive margin. And there's material improvement to be had over the next couple of years. Automation, rightsizing our infrastructure, filling up trucks, redesigning products that are overengineered, there's a lot of money left, both in North America and Europe. And so we're pretty darn confident that you're going to continue to see margin expansion.

Encouraging. Okay. Let's turn to innovation. So what is the percentage of sales from new products launched over the last year if that's the way that you measure it? And where would you like that to get to? Or are you already where you need to be?

Yes. So you'll remember the first year here, we really didn't launch any innovation. It was SKU rationalization and eliminating uneconomic investments so that we could build the pipeline of innovation. So year 2 started basically in the third quarter, which was January of this year right before the pandemic. So while we have a terrific pipeline of innovation, our ability to get it into market has been more limited than it might be in a normal environment because retailers aren't resetting the shelves. So it's less than 5% of sales right now. It's a relatively low number. The encouraging thing in there, though, is that the things that we have launched have proven to be very incremental to the branded category and have really strong velocity. So when customers do get around to resetting the shelves, we have real data, in-market data versus just conceptual data to go show them why they need these products. And so I would expect that it will continue to ramp up over time. I'd like to get our innovation into the high-single digits over time, but it's obviously dependent on how this pandemic plays out and how often retailers are resetting. The good news for us, though, given that we've cleaned up the tail is that when we're launching things now, we're getting incremental distribution. So we gave up a lot of distributions in year 1. We have items on the shelf that deserve to be on the shelf. And when we come with something new, we're picking up space. And you saw on the first quarter earnings announcement that we had, on the Get Bigger brands, about a 9% increase in total distribution points. And I would expect that will continue as we go forward.

Great. And actually, where is that incremental distribution coming from, just out of curiosity?

By which competitors or...

Which channels the incremental distribution is?

Yes. So that's just the measure channel data. So if you look at tea, snacks, yogurt, personal care, you'll see TDPs are going up, average items per store are going up. And it's really on the brands where we brought innovation. Tea, we brought 14 new items. Snacks, we've had a bunch of stuff on Sensible Portions, and we have a lot more coming this fall. And yogurt, we had keto yogurt and multipacks. And so where we've been innovating, we've been gaining space. And like I said, so far, it's been earning its keep, which is great.

Terrific. I know you may have just answered this, but can you tell us a bit more about your priorities for innovation over the next 18 months to 2 years or so?

Yes. So it's the 4 big priority categories in the Get Bigger segment for sure, but we are also finding on some of the Get Better brands that there are some very good innovation opportunities. Snacks for Earth's Best, as an example, is a great opportunity for us to get beyond just formula and pouches and jars into more snacking, which is much higher margin. We're finding on brands like Imagine soup and Spectrum oils, there's some good kind of scrappy innovation opportunities there as well. But the vast majority of the innovation is going to be on tea and snacks and personal care and yogurt.

Very helpful to know. So marketing spending. I think you mentioned on the last call that marketing spending is currently 6.5% of sales, which is roughly double the level you had when you joined a couple of years ago. Where would you expect that to track over time? And where do you still need to invest more?

So the 6.5% is on the Get Bigger brands. It's not the total spend. We did move some of the marketing spend from the Get Better brands to the Get Bigger brands, and we've also added incrementally. I think for tea, snacks and yogurt, 6.5% is probably a good place to be. It doesn't mean that we won't be opportunistic and look to spend more. And in fact, we will have more in this year's budget than we did last year. But it's not like we need to double the budget again. The place that we do need to spend more is in personal care. That's more of a, call it, a fashion business. It's more of a trend business and an image business, and those tend to spend more like 10% of sales. So we've got a little bit more spending to do in the personal care arena. And then, look, we have to continue to refine the spending that we have and make sure that it's more efficient and get rid of the nonworking spending and put more of it into working dollars. So even within that 6.5%, we can continue to get more effective and get more immediate bang for our buck [ and spending it differently ].

Makes sense. Okay. Are there significant new distribution opportunities? And as I think about that, how do you avoid getting overextended on distribution? Because it's always tempting to build sales versus being disciplined about what will create long-term value.

Yes. So this is probably the biggest opportunity we have as a company is distribution and household penetration. You've got to remember that we don't have any billion-dollar brands in this portfolio. We don't have any $0.5 billion brands in this portfolio. So these are great brands with loyal consumer franchises, but there's still tremendous opportunity for awareness and trial and distribution. Even our best-selling products like Sensible Portion, Veggie Straws or Celestial Seasoning, they only have about 70% distribution in measured channels. So I still have opportunity in many accounts in the measured channels. And then as you start to get into alternate channels, we don't do very much food service business, as an example. We should have tea in hotels and hospitals and golf courses, and we don't have much of that. So there's a lot of opportunity. I think your point, though, is a good one. You don't want to just spray it out there and see what sticks. You have to be very choiceful about where you put it. And so one of the focus areas for innovation, for example, has been on incrementality of the things that we launch. How do I get existing consumers to buy more often and use it for different occasions? Or how do I get new people into the franchise that will be loyalist? And so for example, the Screamin' Hot Veggie Straws brings millennial and 20-something men into healthy snacking, whereas our Veggie Straw business was really more mom for kids for the backpack in school. By launching it, it was 80-plus percent incremental, its velocities are in the top half of the category, and we fill the need that wasn't being met and brought in new people. In the case of Celestial, we now just launched a tea that's got as much caffeine as a cup of coffee. So instead of just drinking your Sleepytime tea to help you go to sleep, I don't want to call it wakey time, but maybe there's something that you drink in the morning to get you going from people that already love our brand. So it really is about bringing things that are going to be incremental, not just for us but for the retailer and making sure that we're bringing things that are going to turn and earn their keep on shelf because what I don't want is to create leaky buckets that we have to go clean up at some point in the future.

That makes a lot of sense. So given what's been going on in the e-commerce channels during the pandemic, can you talk about your priorities there? I mean it sounds that it represents about 10% to 12% of North American sales, then grown at over 50% since the pandemic began. How are you latching on to that opportunity?

Yes. So what's great about e-commerce is you can have almost unlimited distribution versus a retail store where there's going to be a finite amount of space. And so there's less of a fight for distribution, but you have to make sure you earn your keep. So one of the things that we do very well, given that our brand started in the natural channel and on e-commerce, we understand the consumer there and how to engage them. So how do I get my brand on the front page when they type in healthy snacks? How do I get into the subscription model where people automatically get replenished every time they put their shopping list together, that our item is on it? How do I bundle things together to make sure that if you're buying the shampoo, you get the conditioner with it and you get some kind of discount to buy the 2 things together? Understanding how to do those things in e-commerce is a point of difference. A lot are just figuring it out, and it's very different than when you market in other social media. And it is something we do very well and one of the reasons we're so developed and growing so quickly. And so we will continue to focus there. It's a great way to generate trial for our new products. It's a great way now that retailers have walmart.com and target.com and kroger.com for us to prove to them that these things are winners to ultimately get them into the store, whereas before, again, you were selling more on conceptual data. So it's a very important channel for us. It's one that we're good at. And frankly, we learned how to make money in the channel so that it's not margin dilutive to the rest of our portfolio. And we will continue to focus there as a way to grow our business.

Great. Yes, and things have certainly changed on that front over the last 6 months or so. Now you mentioned on last week's earnings call that the period of high-level SKU rationalization is now largely behind you, but that ongoing brand divestments and discontinuances are continuing to pressure sales growth. Now if I remember correctly, North America used to have about 50 separate brands, and there were many more in Europe as well. Can you tell us how many brands you have left in each region? And how many you may have left once this brand rationalization process is over? What are we going to be left with?

Yes. So we had 55 brands when I came here, and we were basically selling every brand in both geographies. We're now down to about 37 or so. But really, the vast majority of sales in North America are 85% are done in 12 brands. The other, call it, 20 to 22 brands are only 15%. And that's why we still have some rationalizing to do in the tail. There's too many $5 million to $10 million brands that just aren't going to get nurtured given how many brands we have in total. So we'll have more of that. International is a little bit different because about 1/3 of our sales internationally is private label. And we do a very good job there in private label, and it's much more developed in Europe than it is here. It could be 40% or 50% of some of the categories that we compete in. And private label is an entre to getting your branded offering in. So we have a big private label business. We have about 10, I'll call it, good-sized brands there as well. And part of the whole segmentation of Get Bigger and Get Better was to really focus the energy, both here and abroad, on the brands that are going to make a difference in the algorithm. And the other ones, we're managing more for profit. And if we have an opportunity to sell them, we will explore that for sure.

Great. Actually, just a linked question to that. I mean, how do you deal with the people dynamics associated with sort of smaller brands versus bigger brands? Because, obviously, you kind of want to be in the hot spot, the area that's doing really well. So how do you handle personnel transitions as you're going through all of that?

Yes. So part of the personnel development model is working on brands that you're managing for profit is a different challenge than working on brands you're managing for growth. And so we're encouraging people that it's good for your career to cycle through all of these kinds of opportunities because to be a good general manager someday, you have to know how to do both really well. And by being very singular in terms of our focus, it allows people to go very deep in terms of understanding how you drive profitability or how you drive growth. So it's -- there's no A brands and B brands here. They're all important. They all play a role. Quite frankly, the progress we've made on the Get Better brands on margin has been staggering in 2 years, with being 700 or 800 basis points of margin and the people there are getting handsomely rewarded for delivering those kinds of results. So I think people understand why we have to segment the portfolio, and they understand the value in kind of spending time on each type of assignment. And it makes them better people and puts more tools in their toolkit for future opportunities.

Can I ask about those Get Better brands? I think -- thinking back to the Investor Day, I remember you talking about, for example, I think, on Earth's Best, where the brand had probably been taken into too many peripheral categories and -- that weren't warranted at all. What have been the main levers for improving the margins on those Get Better brands? And -- I mean, has it been mostly pricing and -- for price pack architecture? I mean what are the things you've really been able to do to get that kind of margin improvement?